A contra asset account is a type of contra account that is listed among a company's assets but carries a credit balance, reducing the related asset to its net amount. Normal asset accounts have debit balances, so the opposite balance is what makes it "contra."
How a contra asset account works
The most common example is accumulated depreciation. A company buys equipment for $50,000 and records it with a debit to Equipment. Each year it records depreciation with a debit to Depreciation Expense and a credit to Accumulated Depreciation, rather than a credit to Equipment itself. After three years at $6,000 a year, the balance sheet shows:
- Equipment of $50,000, the original cost.
- Less accumulated depreciation of $18,000.
- A net book value of $32,000.
Keeping the two figures apart lets readers see both what the asset cost and how much of that cost has been used up. The second main example is the allowance for doubtful accounts, which sits against Accounts Receivable. The company estimates how much of its receivables will not be collected and credits the allowance, so that receivables appear at the amount it expects to receive. Because it does not yet know which customers will fail to pay, it cannot reduce individual customer balances, and the contra account holds the estimate until it does. Other contra asset accounts include Discount on Notes Receivable and accumulated amortization of intangible assets. All of them are permanent accounts whose balances carry forward from year to year.